Japan's trade report underwhelms, while May's effort to save Brexit deal falls flat

Chris Scicluna
Emily Nicol

Overview:
While yesterday saw decent gains in equity markets in Europe and the US (the S&P500 more than reversed Monday’s loss to close up 0.85%), Asian markets have been mixed. The Topix closed down 0.3% as Japan’s latest trade data underwhelmed – exports missed expectations but imports rebounded – and other figures confirmed a soft first quarter for machine orders (see the detail below). In a quieter day for Chinese economic news, mainland indices fell too, with the CSI300 closing down 0.5%. But Korean stocks closed higher on the day, after which reports suggested the country’s policymakers were set to investigate recent events in the forex market, which have seen the won depreciate against the dollar by 4½% over the past month and 6½% in the year to date.

In the bond market, having edged up yesterday (with 10Y yields briefly moving above 2.43%), USTs are a touch firmer this morning after St Louis Fed President Bullard – a voting member of the FOMC this year – suggested that December’s rate hike might have “slightly overdone it”. ACGBs, meanwhile, reversed initial losses as the latest construction activity data showed a third consecutive large contraction in Q1.

Moving to Europe, government bonds have largely followed USTs, with yields down in most euro area member states (e.g. 10Y Bunds down 1bp to -0.08% ahead of today’s auction). In addition, Gilts have rallied (10Y yields down 3bps to 1.05%) and sterling has fallen back below $1.27 after MPs from across the political spectrum reacted negatively to yesterday’s last-ditch efforts from Theresa May to save her Brexit deal. So, while she’ll present her proposals to the House of Commons today, the Prime Minister looks more doomed than ever. Data-wise, UK inflation figures will be most notable among today’s handful of releases, while the latest Fed minutes are also due.

Japan:
After Monday’s GDP report showed a surprisingly strong positive contribution to growth from net trade in Q1 – the largest boost since Q317 as a notable decline in imports (the steepest for almost a decade) more than outpaced the drop in exports, which itself was the largest for almost four years – today’s data provided an update on goods trade at the start of Q2.

Despite rising on the month, the value of export values was down almost 2½%Y/Y in April, with shipments to China down more than 6%Y/Y, while exports to the EU fell more than 2½%Y/Y, the largest drop since September. But this weakness was in part offset by an acceleration in exports to the US, which rose more than 9½%Y/Y, the fastest pace for six months. Meanwhile, after a soft Q1, the value of imports was almost 6½% higher compared with a year earlier in April, the firmest pace for five months. As such, the unadjusted trade surplus narrowed ¥467bn to just ¥60trn. On an adjusted basis, the trade deficit narrowed somewhat less, albeit by more than ¥50bn to ¥111bn.

When excluding seasonal and price effects, the BoJ’s export numbers were somewhat more encouraging, with volumes up 1.4%M/M in April to leave the level 1.7% higher than the average in Q1. But import volumes were up a slightly stronger 1.6%M/M last month. And so, if the BoJ’s numbers are to be believed, today’s report suggests net exports provided a modest drag on GDP growth at the start of Q2. It’s worth noting, however, that the implied positive contribution from net trade to GDP growth from the BoJ’s monthly figures Q1 was much smaller than the outcome subsequently reported in the national accounts.

Separately, with private sector capex having provided no support to GDP growth in Q1, today’s machinery orders data raised expectations that non-residential investment will remain subdued over the near term too. Admittedly, the latest monthly figures were more positive than expected, with core orders rising for the second successive month in March and by 3.8%M/M, the most since October. This reflected a near-13½%M/M surge in orders placed by non-manufacturers, underpinned in part by a 40%M/M rise in orders from construction firms. In contrast, orders from manufacturers were down 11½%M/M, due to weakness in demand from ship builders.

However, over the first quarter as a whole, orders placed by manufacturers and non-manufacturers alike were down, leaving private sector orders declining 3.8%Q/Q for the second successive quarter and almost double the pace initially forecast by the Cabinet Office, suggesting that private sector capex might well provide a drag on growth in Q2. And, while the Cabinet Office is forecasting a strong rebound in orders in Q2 (15.7%Q/Q), and the planned hike in the consumption tax later in the year should see some purchases brought forward over coming months, the uncertain economic outlook might suggest firms will remain cautious about their investment plans over the near term too.

Finally, against the backdrop of that slightly improved export performance in April, today’s Reuters Tankan survey suggested that large manufacturers were a touch more upbeat about business conditions in May, with the relevant DI rising 4pts to 12, a three-month high. With the exception of notable drops in the electrical machinery and metal products sub-sectors (which largely reversed April’s gains), the improvement was widespread. And the Tankan suggested that manufacturers were more optimistic about conditions over the coming three months too. However, it’s worth reminding that this survey was conducted ahead of the latest escalation in the China-US trade war. Japanese non-manufacturers were also reportedly more upbeat about conditions in May, with the headline index rising for the second successive month and by 3pts to 27, a four-month high. Despite the improvement, however, overall today’s survey suggests that business conditions remain less favourable than the norms of recent years in both the manufacturing and non-manufacturing sectors, consistent with steady rather than vigorous GDP growth ahead.

UK:
Having briefly yesterday leapt a cent on headlines that Theresa May was set to offer a second referendum on her Brexit deal, sterling swiftly reversed that move – and more (it’s just slipped below $1.27) – after her latest initiatives to break the deadlock in Parliament fell horribly flat. While she claimed to have ten new proposals to meet the demands of MPs from across the political spectrum, many simply appeared to be repackaged from previous commitments while others – such as the aforementioned commitment to an MPs’ vote on a referendum – rang hollow given May’s shenanigans in Parliament over the past couple of years. Crucially, certain key new proposals (e.g. the options on customs arrangements to be voted upon by MPs) went nowhere far enough to appeal to Labour MPs, but at the same time went too far to retain the support of many Conservatives.

Of course, the Prime Minister’s detailed legislative text has yet to be published. And she has the chance to persuade MPs of its merits when she presents her new ideas to the House of Commons today. But May’s chances of winning the all-important MPs vote on her Withdrawal Agreement Bill pencilled in for the week commencing 3 June already appear negligible. And with opinion polls suggesting that her Conservative party will have its worst ever result at the ballot box, with less than 10% of the national vote, in tomorrow’s European Parliament elections, there appears a fair chance that the vote on the Bill early next month won’t even come to pass, and that, instead, May will announce her resignation before the current month is out. That, of course, will leave a vacuum in leadership – and Brexit policy – just four months before the end-October Article 50 deadline. And with most Conservative Party candidates to succeed her likely to talk up the option of a damaging no-deal Brexit, the near-term risks to sterling appear to be significantly skewed to the downside.

Data-wise, today will bring the UK’s inflation data for April. We expect the core CPI rate to rise an above-consensus 0.2ppt to an eight-month high of 2.0%Y/Y due principally to an increase in services inflation related to the timing of Easter. And we forecast a larger increase of 0.3ppt in headline inflation to a five-month high 2.2%Y/Y, due also to higher retail energy prices related to the increase in Ofgem’s regulated price cap at the start of the month. Meanwhile, ONS house price data are highly likely to show that residential property prices remained subdued in March. And public finances figures for April are also due.

Euro area:
No top-tier economic data are due for release in the euro area today. However, this morning ECB President Draghi will be speaking publicly at the ECB colloquium in honour of departing Chief Economist Peter Praet on the topic of “Monetary policy in an incomplete Monetary Union”. In the bond markets, Germany will sell 10Y Bunds.

US:
In the US, today will bring the publication of the FOMC’s minutes from its 1 May meeting, which brought no change to the target range for the fed funds rate but saw the Board of Governors make a technical adjustment, reducing the rate paid on required and excess reserves by 5bps to 2.35%. FOMC members Williams and Bostic will also speak publicly, after St Louis Fed President James Bullard in Asia earlier today suggested that December’s rate hike might have been a mistake (“I am concerned we may have slightly overdone it” and “we are a little bit tight right now”).

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